BNP Paribas Asset Management is introducing tougher criteria for green bonds to focus on deals with tangible environmental benefits at the bond and issuer level, as the firm believes that the market’s self-imposed guidelines are not cutting out so-called greenwashing.
The "dark green" ESG fund manager is tightening its green bonds methodology as it feels that greenwashing – putting an environmentally-friendly label on deals that don't really help the fight against climate change – is still prevalent despite the use of internationally-accepted market standards.
"Despite the fact that that we have the green bond principles and market-led initiatives, there is still greenwashing in the market," said Felipe Gordillo, a senior ESG analyst at BNPP AM.
Although more borrowers and deals are meeting industry standards such as the International Capital Markets Association’s Green Bond Principles, BNPP AM will require even higher standards and will turn down deals that meet minimum market expectations from companies that set their own targets.
BNPP AM is using three concepts: "green-ness", "integrity", and "ambition", and green bonds will have to meet minimum standards for all three criteria to be purchased for the firm's global green strategy.
Using the new methodology, around 18% of green bonds in the market do not currently make the cut, the fund manager said.
"Self-labelled is not enough. We believe that not all green bonds are created equal and there is a need for an extra level of due diligence if you want to avoid greenwashing," Gordillo said.
The firm is wary of deals with a mismatch between a large balance sheet and a small green bond, which BNPP AM believes shows a disconnect between a green bond programme and a companies’ overall strategy.
It is also avoiding deals by "brown" issuers that claim to reduce carbon emissions, but are continuing to make large emissions, such as bonds that are financing renewables projects for high-emitting utilities that are also continuing to expand coal-fired energy.
Green bonds that finance gas are also becoming increasingly controversial.
"Any green bond or self-labelled green bond that is related to fossil fuel is a no-go for us; it's a red line that we won't cross," said Xuan Sheng Ou Yong, a green bonds and ESG analyst at BNPP AM.
The changes that BNPP AM is making will deepen the green credentials on its €483bn of assets and see the firm adopt more of an impact investing philosophy.
While other market participants accept the need for clear distinction and a spectrum of issuers, they argue that not all "light green" deals are greenwashing.
Three pillars
BNPP AM's new methodology will use the EU Taxonomy to assess "green-ness" and the environmental benefits of the use of proceeds, "integrity" will look at how proceeds are implemented through measuring and reporting, and "ambition" will be assessed by the extent to which a bond contributes to the borrower’s decarbonisation.
"Issuing a green bond is not sufficient to drive down your carbon intensity. At some point issuers need to see green bonds as a tool not for a single transaction but as a tool to actually green their balance sheets,” Gordillo said. “We need green bonds to be sufficiently ambitious to contribute to the overall corporate decarbonisation target."
The fund manager’s sustainability research team will use a two-step framework to assess each green bond at the time of issuance and one or two years later, which will give a score out of 100, and only bonds rated neutral or positive will be bought.
BNPP AM’s analysis also looks at how the green bond helps borrowers to transition to a more sustainable business model, how quickly companies will allocate proceeds and how much of proceeds are used for refinancing and new financing.
After deals are issued, BNPP AM will also monitor allocation and the integrity of the impact reporting to assess the environmental impact, which includes what the financing has achieved as well as how it contributes to borrowers’ decarbonisation.
"Our idea is to build a universe of eligible green bonds that show the highest characteristics and the highest quality standards, and contributes to mitigating carbon emissions," Gordillo said.